Winding-Up Petitions And Arbitration Agreements

Winding-up petitions and arbitration agreements

In Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“the Lasmos case”), High Court of Hong Kong (Harris J) struck out a winding-up petition issued by Lasmos (for failure by Southwest to pay a debt under a statutory demand), arising out of a management services agreement that contained an arbitration clause. The issue in the case was the impact of the arbitration clause on the exercise of the court’s discretion to make a winding-up order.

Prior to this decision, the generally accepted position under Hong Kong law was that the fact that an agreement contained an arbitration clause would not prevent the presentation of a winding-up petition pursuant to the Hong Kong compulsory winding up regime, and that where a winding-up petition was issued, an arbitration clause in an agreement covering the debt in question was usually considered to be irrelevant to the court’s exercise of discretion to make a winding-up order.

Harris J framed the issue as follows [5]:

“A number of recent authorities in both England and Singapore have considered the impact the presence of an arbitration clause in an agreement giving rise to a debt relied on to support a winding-up petition, has on the exercise of the court’s discretion to make a winding-up order. I asked to be addressed on the authorities and whether Hong Kong law should develop in a similar manner. I consider this question in the next section of this decision.”

The Court examined the following Hong Kong authorities:

Hollmet AG v Meridian Success Metal Supplies Ltd [1997] 4 HKC 343, where Rogers J stated [347B–H]:

“… The procedure of winding up is to wind up an insolvent company. What the court is concerned to see is whether or not the company is insolvent. The basis upon which that may be presented, may be under s 178 or it may be on a different basis but at the end of the day, the court must consider whether the company is insolvent.

One then turns back to art 8(1), one sees that a winding up proceeding is not a matter which is the subject of an arbitration agreement, it is the underlying contract which is the subject of an arbitration agreement. It is common ground between the parties that in all other types of winding up cases when the court is faced with the question of whether a debt is owing, the test it applies is whether there is a bona fide dispute on substantial grounds.

If there is an agreement which provides that disputes should go to arbitration, until the court is satisfied that there is a dispute, it seems to me that it can still be said that money is due and owing under the contract. It is only once the dispute has arisen that the arbitration comes into being.”

Re Sky Datamann (Hong Kong) Limited (unrep. HCCW 487/2001, 29 January 2002), when Yuen J stated [12]:

“Accordingly, it is clear that the court is not obliged to strike out or stay a petition merely because the petitioner and the company had entered into a contract with an arbitration clause, or even if the company has commenced arbitration. It is a matter for the discretion of the court in each case. In exercising its discretion, the court will consider all relevant circumstances, including the financial position of the company, the existence of other creditors, and the position taken by them.”

Re Jade Union Investment Limited (unrep. HCCW 400/2003, 5 March 2004), where Barma J stated [18-21]:

“A petition for the winding up of a company is quite different from an action between parties, in which the parties seek the court’s determination as to their respective rights and liabilities. By a winding up petition, a creditor invokes the court’s jurisdiction under the Companies Ordinance to wind up a company on one or more of the grounds set out in section 177(1) of that Ordinance. In doing so, it exercises a class right available to all of the company’s creditors…

…it seems to me that the court, in exercising its winding up jurisdiction, in cases such as this, where the company asserts that the debt on which the petition is founded is disputed, is concerned first to determine whether or not the petitioner is to be regarded as a creditor of the company so that it is entitled to present the petition. This it does by considering whether or not the debt is bona fide disputed on substantial grounds. Neither the existence of an arbitration clause in a contract between the petitioner and the company, nor the existence of an arbitration commenced pursuant to it, of themselves demonstrate that the debt is in fact bona fide disputed on substantial grounds. It remains necessary for the company to discharge its burden of establishing this, by placing before the court the evidence from which the court can see that such a dispute exists…

This brings me to the third strand of Mr Harris’ argument. I am afraid that I am unable to agree with it. If, having considered the evidence, the court concludes that there is no bona fide dispute of substance in relation to the debt relied upon by the petitioner, I see no good reason why the existence of an arbitration clause should be regarded nonetheless as somehow relevant to the court’s exercise of its discretion as to whether or not to make a winding up order.”

Harris J refers to his previous decision in Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759, where he summarised the above cases in the following terms [18]:

“Commonly a winding-up petition issued on the grounds of insolvency relies on a statutory demand to prove insolvency. If it does so in order for the company to defeat the petition it must demonstrate that it has a bona fide defence on substantial grounds to the claim for the underlying debt. That determination is undertaken by the court. The petition will not be stayed to arbitration if the debt arises under an agreement which contains an arbitration clause: see the decision of Yuen J (as she then was) in Re Sky Datamann (Hong Kong) Ltd. This is consistent with the nature of winding-up proceedings. The creditor does not seek to recover the sum due to him under the agreement containing the arbitration clause; rather he seeks to put an insolvent company into liquidation for the benefit of all its creditors.”

The Court went on to consider various authorities from England, stating that “…the present position in England is that if an alleged debt arising under an agreement containing an arbitration clause is not admitted the petition should be dismissed” [20]

In the English case of Salford Estates (No.2) Ltd v Altomart (No.2) [2015] Ch 589, in considering the discretionary power to wind up a company, Sir Terence Etherton C stated [39-40]:

“It is entirely appropriate that the court should, save in wholly exceptional circumstances which I presently find difficult to envisage, exercise its discretion consistently with the legislative policy embodied in the [English Arbitration] Act.

…Exercise of the discretion otherwise than consistently with the policy underlying the 1996 Act would inevitably encourage parties to an arbitration agreement—as a standard tactic—to bypass the arbitration agreement and the 1996 Act by presenting a winding up petition. The way would be left open to one party, through the draconian threat of liquidation, to apply pressure on the alleged debtor to pay up immediately or face the burden, often at short notice on an application to restrain presentation or advertisement of a winding up petition, of satisfying the Companies Court that the debt is bona fide disputed on substantial grounds. That would be entirely contrary to the parties’ agreement as to the proper forum for the resolution of such an issue and to the legislative policy of the 1996 Act.”

In Revenue and Customs Commissioners v Changtel Solutions UK Ltd [2015] 1 WLR 3911, Vos LJ said the following in relation to Salford Estates:

In that case, however, the debt fell within the wide ambit of the arbitration clause, and Sir Terence Etherton C thought it was right as a matter of discretion for the court to stay or dismiss the petition so as to compel the parties to resolve their dispute, as to whether, in effect, summary judgment on the debt was appropriate, by their chosen method of dispute resolution rather than requiring the court to investigate whether the debt was disputed in good faith on substantial grounds…

…the fact that the parties had agreed an alternative method of dispute resolution was, as a matter of discretion, relevant to whether it was appropriate to allow the petitioner to proceed with a winding up before having it determined that the debt was due by the method that it had agreed.

Harris J also referred to Eco Measure Market Exchange Ltd v Quantum Climate Services Ltd [2015] BCC 877 where the court summarised the decision in Salford Estates as follows [10]:

“The result of Salford (above), it seems to me, is to place a very heavy obstacle in the way of a party who presents a petition claiming sums due under an agreement that contains an arbitration clause. The problem for such a petitioner is that the company is entitled to have the petition dismissed without having to show, as would normally be the case, that the debt upon which the petition is based is, to use the time-hallowed expression, bona fide disputed on substantial grounds. What the Court of Appeal decided in clear terms in the Salford Estate case was that, where there is an arbitration clause, it is sufficient to show that the debt is ‘disputed’ and for that it is sufficient to show that the debt is not admitted. In this case it is clear that the debt is disputed and indeed the dispute goes beyond a mere non-admission.”

In relation to Singapore, Harris J referred to BDG v BDH [2016] 5 SLR 977, where the court stated [9]:

“However, where an arbitration agreement governs the dispute, the relevant standard is whether prima facie there is an arbitration clause and if so, the dispute is governed by that clause: Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 (‘Salford Estates’); Eco Measure Market Exchange Ltd v Quantum Climate Services [2015] BCC 877. The position in England and Wales should be adopted in Singapore as well as it gives due recognition to the upholding of arbitration agreements. Using the summary judgment standard of triable issues would result in the courts usurping the functions of the arbitral tribunal and condoning breach of the arbitration agreement. The English approach in Salford Estates would be consistent with Singapore decisions granting stay of proceedings in favour of arbitration. There is also a strong leaning in Singapore towards upholding arbitration agreements.”

The Court acknowledged the development of Hong Kong law – which encourages party autonomy in resolving their disputes – and departed from the approach in earlier Court decisions. Harris J held [31] that a petition to wind up a company on insolvency grounds should “generally be dismissed” when the following three requirements are met:

  • if a company disputes the debt relied on by the petitioner;
  • the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
  • the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with r 32 of the Companies (Winding-up) Rules, Cap 32H, demonstrating this.

Harris J noted that the effect of this approach is that the company was entitled to have the petition dismissed without having to show that the petitioning debt was bona fide disputed on substantial grounds, such that where there is an arbitration clause, it is sufficient to show that the debt is “disputed” and for that it is sufficient to show the debt is not admitted (Eco Measure Market Exchange Ltd v Quantum Climate Services Ltd [2015] BCC 877 at §10).

The decision has attracted considerable attention from legal practitioners. See the following reviews:

PRACTITIONER NOTE:

Lasmos has subsequently been considered in the following HK cases:

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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